Answer
a) The quantity and price for the firm, respectively, are $Q_{0}$ and $P_{0}$. The area representing the profit is the square that is the difference in the price and the average total cost ($P_{0}$ and $ATC$, respectively), multiplied by the quantity sold ($Q_{0}$).
b) Since the firm is making a profit, more firms will enter the market. This will shift the demand curve for this firm's items to the left, decreasing the price and the output. Eventually, firms will enter until there is no profit.
c) The price elasticity becomes more inelastic. Prices increase, output may increase, and profits may increase.
d) The firm is on the elastic section of the demand curve.
Work Step by Step
a) Please see the first graph. The firm will produce until the marginal revenue and marginal cost curves intersect.
b) Please see the second graph.
c) Since people are more focused on the styles of the shoes, the focus will be less on price. If the different styles are not copied by other firms, Sleek Sneakers might earn a profit.
d) Currently, the marginal revenue is greater than zero, since the firm is in a monopolistic competition. (There are many firms with differentiated products.) Thus, the firm is on the elastic section of the demand curve.
